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Designing pension benefits when longevities increase with wages

Author

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  • Andras Simonovits

    (Institute of Economics Centre for Economic and Regional Studies, Hungarian Academy of Sciences also Mathematical Institute of Budapest University of Technology)

Abstract

At the design of public pension systems, the designers frequently neglect that higher earners statistically live longer, and possibly also retire later. Since the first difference has recently been rising steeply, this negligence is less and less tolerable, especially with nonfinancial defined contribution system (NDC). We analyze three simple connected pension models to understand how the redistribution from the low-earners to the high-earners can be reduced or reversed. Our answers: either mixing NDC and flat benefit or reducing the weight of wage indexation of benefits. It is an open question how the neglected behavioral reactions (lower share of NDC implies lower labor supply and greater tax evasion) influence the social welfare.

Suggested Citation

  • Andras Simonovits, 2018. "Designing pension benefits when longevities increase with wages," IEHAS Discussion Papers 1804, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:1804
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    References listed on IDEAS

    as
    1. Feldstein, Martin, 1990. "Imperfect annuity markets, unintended bequests, and the optimal age structure of social security benefits," Journal of Public Economics, Elsevier, vol. 41(1), pages 31-43, February.
    2. repec:pal:gpprii:v:42:y:2017:i:3:d:10.1057_s41288-017-0057-0 is not listed on IDEAS
    3. Edward Whitehouse & Asghar Zaidi, 2008. "Socio-Economic Differences in Mortality: Implications for Pensions Policy," OECD Social, Employment and Migration Working Papers 71, OECD Publishing.
    4. Ayuso, Mercedes & Bravo, Jorge Miguel & Holzmann, Robert, 2016. "Addressing Longevity Heterogeneity in Pension Scheme Design and Reform," IZA Discussion Papers 10378, Institute of Labor Economics (IZA).
    5. Peter A. Diamond, 2005. "Taxation, Incomplete Markets, and Social Security," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262541823, January.
    6. Sánchez-Romero, Miguel & Prskawetz, Alexia, 2017. "Redistributive effects of the US pension system among individuals with different life expectancy," The Journal of the Economics of Ageing, Elsevier, vol. 10(C), pages 51-74.
    7. Andras Simonovits, 2015. "Benefit-Retirement Age Schedules and Redistribution in Public Pension Systems," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(5), pages 362-376, October.
    8. repec:bla:scandj:v:118:y:2016:i:4:p:868-911 is not listed on IDEAS
    9. Martin Feldstein, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 303-320.
    10. Peter Eso & Andras Siminovits, 2002. "Designing Optimal Benefit Rules for Flexible Retirement," Discussion Papers 1353, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Alan J. Auerbach & Kerwin K. Charles & Courtney C. Coile & William Gale & Dana Goldman & Ronald Lee & Charles M. Lucas & Peter R. Orszag & Louise M. Sheiner & Bryan Tysinger & David N. Weil & Justin W, 2017. "How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(3), pages 475-499, July.
    12. P. Eső & A. Simonovits & J. Tóth, 2011. "Designing benefit rules for flexible retirement: Welfare vs. redistribution," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 61(1), pages 3-32, March.
    13. Robert Holzmann & Edward Palmer, 2006. "Pension Reform : Issues and Prospects for Non-Financial Defined Contribution (NDC) Schemes," World Bank Publications, The World Bank, number 6983.
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    More about this item

    Keywords

    public pension system; retirement age; wage indexation; wage-dependent life expectancy;

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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